What a way to start 2020, we cannot recall the digital asset market making such extreme highs and lows in one quarter. So much has happened over the course of this quarter that one would almost forget that Bitcoin was trading comfortably above $10.000 in February. It did so in anticipation of the halving. Around the 10th of May, Bitcoin’s inflation rate will drop from 3.9%, to around 1.9%, coincidentally lowering inflation (expectations) in line with global economies on the back of COVID-19 and subsequent demand shock. We have extensively discussed the halving and potential outcomes in our previous publication. We will use this quarterly report to zoom in on a major development; the rise of stablecoins and Central Bank Digital Currencies.

The rise of stablecoins

The obvious question; what is a stablecoin? A stablecoin is a cryptocurrency that attempts to peg its price to some external reference or reserve asset. The oldest stablecoin out there, USDT, issues USDT the moment it receives USD to its bank accounts and sends these USDT to a pre-determined given address. The system effectively mines 1 USDT in exchange for 1 USD. Every USDT in theory should be backed by it’s reserve asset USD. It immediately shows that the trust in this system is with the issuer of the stablecoin, a point which we will discuss more in depth below. By issuing a digital native, or stablecoin, users get three main advantages.

  • First of all, users get the benefits of instant global processing, subject to the speed of the blockchain. If a stablecoin is based on the Ethereum blockchain, you could wire anyone your stablecoin within a matter of minutes, just like Ethereum itself.
  • Privacy. As you are not obliged to use third parties (banks) for wiring money, one has full payment privacy. This is not to say that in most cases, users will use wallets of third party providers which offer different levels of privacy and usability dependent on jurisdictions they are active in.
  • Volatility-free trading and paying. Stablecoins achieve price stability by their reserve backing or collateralization. This again, is dependent on the issuer, and the processes that are in place to guarantee maximum price stability. There are also stablecoins who derive their value from a basket of assets, like Maker. Stablecoins have gained very high popularity over the years as they have become the prime safe haven for crypto and blockchain investors. Generally speaking, if one wanted to reduce risk to Ethereum and Bitcoin, one could derisk via stablecoins like USDT and USDC. To such an extent that we have observed record transaction volume in all stablecoins of around ​90 bln USD​ in the first quarter of this year.

The biggest issuers to date are USDT (Tether) and USDC (Coinbase and Circle backing). As shown in the chart below, in the past 2 years the circulating supply of USDT tokens has grown to 6.4 billion (equal to 6.4 billion dollars). In the past USDT offered a good entry into the crypto market, especially if one wanted to execute bigger size. From then owning USDT, one was easily able to buy Bitcoin or other related names. But what’s particularly interesting is the increase over the last few months. There are various research reports out there that show that a far lesser portion of the stablecoin increase is actually being deployed into other crypto assets. It seems that (especially Asians) investors are using stablecoins as a safe haven in times of economic uncertainty. By transferring to USDT they can hold the assets in their own custody and are not dependent on third parties. Especially in countries with less stable monetary policies and banking systems this seems to be a very valid use case for time of stress in the financial system, and we are observing that in the numbers.

Facebook, ECB, JPMorgan, De Nederlandse Bank. They all have in common that they are researching their own stablecoin. In the case of Facebook this is a clear example of corporate backed money, whereby a set of rules and governance must be able to implement trust into their stablecoin. Important to note, that recently they have shifted away from their earlier idea of a global Facebook coin, to local EUR and USD backed Facebook coins, backed by reserve assets held by Facebook. It’s an interesting experiment and further builds on the earlier work done by USDT and others. Obviously, this opens up a good debate about who has the sovereignty of money. While this is traditionally with Central Banks, we have seen new programmable money arise with crypto assets. On a monetary level, one could argue that the current and future support packages, which are more than justified, do not help the ‘hardness’ of current fiat money.

The ECB, De Nederlandse Bank, and other Central Banks around the world are researching their own variant of stablecoins: CBDCs, short for Central Bank Digital Currencies. This is a digital native issued by the Central Banks. A first implementation which we are currently seeing in China and is also being discussed by others, is a dual structure, whereby a consumer has one commercial bank account and one with the Central Bank. By experimenting this way, users can slowly get used to having a bank account with Central Banks or affiliated parties, while at the same time becoming familiar with digital money.

On another note, we were surprised to see the latest ​press release by DNB​ on this in which they also clearly discuss the role of private/corporate money, signaling that Central Banks are slowly losing sovereignty over money:

“In principle, we therefore have a positive attitude towards CBDC. Its introduction could promote the smooth functioning of the payment system. For example, CBDC could serve as a backup to payments made in private money, considering that we become exceedingly dependent on private money in a rapidly digitising payment system. A case in point is the fact that, due to the coronavirus pandemic, many retailers ask their customers to refrain from using cash, meaning they effectively only accept private money.”

We foresee a world of digital currencies, in which the user can choose between a range of different digital primitives of currencies as we know them today, or other forms of stablecoins, all targeting different purposes or user needs. But it is more than clear that the work that has been done in the field of digital currencies by every major institution, public and private, bodes very well for the use case of crypto and current developed blockchains.

Portfolio Update

An update on some of our portfolio companies. Important note here is that, as a reaction of the COVID’19 crisis and potential impact on start-ups, we reached out to all portfolio companies to discuss matters concerning their runways and burn rates. Generally speaking, everyone is more than aware of being diligent with the runway and all have a comfortable runway off between 12-24 months, with most being around 18 months.

Nash Exchange, unchanged in price for the year, has launched it’s non-custodial Bitcoin trading and is now entering the growth and acquisition phase. It was an important step in the lifecycle of the company and we look forward to the roll out of other products like fiat on- and offramps and derivatives trading which is currently being researched.

Elrond Network launched its first decentralized application which utilizes their ERD token. As they have partnered with Samsung in 2019, this application is now available in the Samsung Appstore. In addition, Elrond has started the staking mechanism for ERD tokens, as of now 21% of the tokens are locked in the staking contract.

Dusk Network has been very active on the development and business front. Dusk has been testing their sandbox-mainnet in Q1 of 2020. The highlight of this quarter was the partnership with Firm24. Together they announced the intention to tokenize the equity of thousands of small and medium-sized enterprises (SMEs) that have their share registry documented at Firm24. This will all be done on the Dusk blockchain.

BloXroute finalized it’s latest funding round, an important milestone to weather uncertain times, and giving the company enough runway for the coming period.

Finally, we are about to add new companies to our portfolio and we are looking forward to share this publicly once the investment processes are finished.

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